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Sanderson Farms (SAFM) Down 7.3% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Sanderson Farms (SAFM - Free Report) . Shares have lost about 7.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sanderson Farms due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Sanderson Farms Q4 Earnings Beat Estimates, Sales Up

Sanderson Farms, Inc posted fourth-quarter fiscal 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate as well as increasing year on year. Results gained from favorable trends for chicken products. Moreover, feed costs also remained low during the quarter.

However, management informed that the company continued to struggle with weak food services, as demand from restaurants remained low due to the coronavirus pandemic-induced social distancing. Market prices were weak for boneless breast meat as well as other products from the company’s big bird food service plants

Nevertheless, the demand for products sold at retail grocery stores, especially for chicken products were strong. Management expects such trends to continue until away from home dining trends resume in large numbers. As a result, the company is focusing on boosting the production of tray packs, which are in high demand at retail grocery stores.

Q4 in Detail

The company reported earnings of $1.26 per share, which beat the Zacks Consensus Estimate of a loss of 8 cents. Moreover, the bottom line depicted a considerable improvement from a loss of $1.05 per share in the year-ago quarter.

Net sales came in at $940 million, which surpassed the Zacks Consensus Estimate of $909.4 million. Moreover, the metric increased 3.7% from $906.5 million posted in the year-ago quarter. The top line benefited from increase in realized prices for poultry.

During the fiscal fourth quarter, average boneless breast meat market prices increased 2.8% year over year. Average market price for Jumbo wing were up 9%, while average market price for bulk leg quarters fell nearly 42.8% year on year.

For the fourth quarter, the overall cash cost for grain delivered to feed mills was higher than the year-ago quarter. Prices paid for corn delivered declined 15.2% and soybean meal increased 4.7%. Soybean meal and corn are part of the company’s primary feed ingredients.

We note that cost of sales declined 4.1% to $848.3 million in the reported quarter. Further, SG&A expenses fell 3.3% to $49.5 million in the reported quarter. The company reported operating income of $42.3 million compared with operating loss of $32.4 million.

Balance Sheet

Sanderson Farms ended the quarter with cash and cash equivalents of $49 million, long-term debt (less current maturities) of $25 million and total shareholders’ equity of $1,419 million. As of Oct 31, 2020, the company had working capital of $354 million.

Management highlighted that for fiscal 2020, the company incurred expenses worth $202.4 million on capital improvements. Also, it paid out dividends worth $31.1 million during the year. In fiscal 2021, the company expects capital expenditures of nearly $163.8 million related to special projects, construction and maintenance work.  

Outlook

The USDA lowered its crop yield estimates for corn and soybean in 2020, while increasing its estimates for export demand. As a result, market prices for both corn and soybeans have increased since September. Accordingly, management expects feed grain costs to rise in 2021. Based on fiscal 2020 volumes, cash costs for corn and soybean meal in fiscal 2021 is likely to increase by $193.2 million year on year.

Apart from this, the company is cautious regarding soybean and corn crops in Brazil and the rest of South America owing to pockets of dry hot weather. Additionally, the company continues to keep a close watch on chicken production numbers. The USDA expects chicken production to increase nearly 1% in 2021.

Moving on, the company expects that demand from food service customers is likely to be under pressure, until traffic at restaurants picks up pace. Nevertheless, management is encouraged regarding the demand for products sold at retail grocery stores. The company expects favorable conditions for the away-from-home food category, as consumers continue adhering to at-home cooking.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions. The consensus estimate has shifted 7.41% due to these changes.

VGM Scores

Currently, Sanderson Farms has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Sanderson Farms has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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